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2 Innovation systems: city-state, national, continental and sub-national Chris Freeman 1. INTRODUCTION This paper discusses variations over time in rates of growth of various economic regions and the extent to which these variations may be attributed to innovation systems. There has been a rapidly growing literature on this topic during the 1990s (see, for example, Lundvall, 1992; Nelson, 1993; Mjøset, 1992; Villaschi, 1993; Humbert, 1993; Freeman, 1996; Burger and Dore, 1996; Reinert, 1997). Much of this literature (see especially Hu, 1992; Porter, 1990; Patel, 1995; Wade, 1996) insists on the central importance of national systems but a number of authors have argued that globalisation has greatly diminished or even eliminated the importance of the nation-state (notably Ohmae, 1990). Other critics have stressed alternatively (or in addition) that sub-national entities, such as provinces, industrial districts, cities or Silicon Valleys are becoming, or have already become, more important than the nation-state (see, for example, debresson, 1989, 1991). Unfortunately, at least in the English language, the same word Regional is often used to describe two entirely different phenomena, viz: 1) Geographical areas embracing several nation-states and even entire sub- Continents the Pacific region, East Asia, Eastern Europe, Central America, etc. etc. 2) Geographical areas which are smaller sub-divisions of nation-states, e.g. states, urban areas, countries, rural areas, etc, etc. This can be a source of confusion, so for this reason, this paper refers to the wider areas as Continental or sub-continental and the smaller areas as subnational. 109

3 The inter-continental variations in growth rates are indeed very wide, as illustrated in Table 1, but the variations between countries have of course been even wider. In particular, a group of countries, today referred to as developed or industrialised drew far ahead of the rest of the world (later known as underdeveloped ) during the last two centuries (Table 2, Columns 5 and 6). Abramovitz (1986) coined the expression social capability to describe that capacity to make institutional changes which led to this divergence in growth rates. He was himself one of the pioneers of growth accounting but, as he cogently pointed out, the accumulation of capital and increase in the labour force are not in themselves sufficient to explain these varying rates of economic growth. The huge divergence in growth rates which is so obvious a feature of long-term economic growth over the past two centuries must be attributed in large measure to the presence or absence of social capability for institutional change, and especially for those types of institutional change which facilitate and stimulate a high rate of technical change, i.e. innovation systems. As we shall see, attempts by Krugman (1994) and others to go back to the quantitative accumulation of capital and labour as the main explanation of the East Asian Miracle are very unconvincing. Institutional changes were essential for the accumulation of capital itself. Many historians and economists had of course always emphasised the importance of technical and institutional change, as for example, Landes (1970) or Supple (1963). Indeed, going back to the early development of economic theory, Friedrich List (1841) had strongly criticised Adam Smith and other classical economists for what he perceived as their neglect of technology and skills. In fact, Adam Smith did recognise the great importance of science and technology but did not consistently give it the prominence which List thought that it merited. The main concern of List was with the problem of Germany catching up with England and for underdeveloped countries, (as the German states then were in relation to England), he advocated not only protection of infant industries but a broad range of policies designed to make possible or to accelerate industrialisation and economic growth. Most of these policies were concerned with learning about new technology and applying it and many of them were applied in catching up countries over the next century and a half (see Section 5). After reviewing the changing ideas of economists about development in the years since the Second World War, the World Bank (1991) concluded that it is intangible investment in knowledge accumulation, which is decisive rather than 110

4 physical capital investment, as was at one time believed (pages 33-35). The Report cited the New Growth Theory (Romer, 1986; Grossman and Helpman, 1991) in support of this view but the so-called New Growth Theory has in fact only belatedly incorporated into neo-classical models the realistic assumptions which had become commonplace among economic historians and neo-schumpeterian economists. Indeed, it could just as well have cited Friedrich List (1841), who in criticising a passage from Adam Smith said:... Adam Smith has... forgotten that he himself includes (in his definition of capital) the intellectual and bodily abilities of the producers under this term. He wrongly maintains that the revenues of the nation are dependent only on the sum of its material capital. and further: (page 183) The present state of the nations is the result of the accumulation of all discoveries, inventions, improvements, perfections and exertions of all generations which have lived before us: they form the intellectual capital of the present human race, and every separate nation is productive only in the proportion in which it has known how to appropriate those attainments of former generations and to increase them by its own acquirements. (page 113) List s clear recognition of the interdependence of domestic and imported technology and of tangible and intangible investment has a decidedly modern ring. He saw too that industry should be linked to the formal institutions of science and of education: There scarcely exists a manufacturing business which has not relation to physics, mechanics, chemistry, mathematics or to the art of design, etc. No progress, no new discoveries and inventions can be made in these sciences by which a hundred industries and processes could not be improved or altered. In the manufacturing State, therefore, sciences and arts must necessarily become popular. (page 162) 111

5 The recent literature on national systems of innovation could be described as an attempt to come to terms more systematically with these problems of social capability for technical change. List s book on The National System of Political Economy might just as well have been entitled The National System of Innovation since he anticipated many of the concerns of this contemporary literature. The main purpose of this paper is to discuss the relevance of systems of innovation to economic growth rate over the last two centuries. A long-term historical approach is essential for this purpose because of the very nature of technical and institutional change. The enormous gaps between different parts of the world took decades or even centuries to open up and the efforts to close them have also taken many decades. The analysis starts with the case of Britain in the eighteenth century because Britain was the first country to open up a major gap in productivity, in technology and in per capita incomes, compared with all other nations and city states. However, before turning to the British industrial revolution in Section 3 this paper first discusses the differences between the city state innovation systems of Renaissance Italy and the British national system. The British case is discussed at some length both because it was the first and also because it serves to introduce some basic problems in the theory of innovation systems - notably the complementarity (or lack of it) between various sub-systems of society: science, technology, economy, politics and culture, and the complementarity between national and sub-national systems. The British slow-down and falling behind in the 20th Century also illustrates the relative rigidity of some organisational structures compared with informal institutions, a point emphasised by Edqvist (1997a and 1997b) in his thorough review of national systems theory. Following this discussion in Sections 2 and 3, Section 4 then takes up the second major example of a national system forging ahead of the rest of the world - the case of the United States in the second half of the nineteenth and first half of the twentieth century. The remainder of the paper then discusses the innovation systems of catching up countries, which have been discussed by Viotti (1997) in an excellent dissertation as learning systems. He makes an interesting distinction between active and passive learning systems and applies this distinction to the example of Korea and Brazil, an example which is reviewed in Section 5. A very different example was that of the former Soviet Union and other East European countries which were catching up in the 1950s and 1960s but falling behind in the 1980s and 1990s. This case is reviewed in Section

6 Finally, the concluding Sections of the paper speculate about the possible course of events in the next century, taking up the question of globalisation and convergence and drawing some conclusions about the role of innovation systems in future economic growth. 2. CITY-STATE SYSTEMS OF INNOVATION BASED ON TRADE AND THE TRANSITION TO THE BRITISH SYSTEM BASED ON INDUSTRY In his brilliant essays on Competitiveness and its predecessors - a 500 year cross-national perspective and on The Role of the State in Economic Growth, Reinert (1995, 1997) has shown that already in the 15th Century during the reign of Henry VII, Britain began a policy of deliberately promoting the woollen industry, placing an export duty on raw wool and an import duty on woollen manufactures, and encouraging the immigration of skilled craftsmen. Furthermore, some Italian city-states, especially Venice, already had established policies to promote invention and learning (Table 3). Reinert shows that Italian economists, especially Antonio Serra (1613) had already propounded ideas reminiscent of later theories on national systems of innovation and he is therefore justified in dating the origin of national systems to the Renaissance period. However, this paper takes the British Industrial Revolution as its starting point for reasons which will be explained in this Section. The capacity for technical and social innovations did of course strongly influence economic life before nation-states became the dominant form of political organisation. Although Adam Smith s book was entitled The Wealth of Nations and his main concern was to explain the different progress of opulence in different nations he nevertheless included a long discussion of The rise and progress of cities and towns since the fall of the Roman Empire. The contemporary discussion is therefore certainly not entirely new: changing forms of political organisation and territorial boundaries necessarily changed the nature of the debate. For Adam Smith, it was the widening gap in living standards and in manufacturing industry between Britain and other political units in Europe which most intrigued him. Some of these were powerful nation-states, such as France and Spain, others were still city states or small principalities and still others were Empires. In their fascinating account of the history of naval power, Modelski and Thompson (1993) suggest that one of the main determinants of commercial prosperity for a thousand years was the capacity to innovate in navies, in shipping, 113

7 in foreign trade and in finance. They maintain that China lost the technological leadership which it had enjoyed well into the second millenium AD, because the old South China (Sung Dynasty) leadership in foreign trade and naval power was overturned by a shift in the focus of power in China to Northern Chinese and Continental interests. Following the loss of Chinese dominance in trade and technology, it was, according to their account, those Mediterranean city-states which organised and led the trade with Asia which then became the most prosperous parts of the world. They were responsible for the main innovations in ship-building, in naval ordnance, and in the organisation, provisioning and finance of trade and shipping (Table 4). Britain became a great trading nation already in the fifteenth and sixteenth centuries and the dominant naval power with the defeat of the Spanish Armada (1588), the Dutch fleet (1650s) and the French fleet at Trafalgar (1805). A good case can be made therefore for dating the British national system of innovation much earlier than the eighteenth century. However, in this account a line has been drawn across the middle of Table 4 to indicate the new period ( Britain II ) which began with the Industrial Revolution. This is intended to mark the transition from policies which were mainly concerned with the promotion and protection of trade, with the finance of shipping, trading posts and cargoes, with the ship-building industry and naval power to policies which were mainly concerned with manufacturing industry. The city-state innovation systems and the national systems of Spain, Portugal and the Netherlands belonged to the first category and so did the British system up until about the time of Adam Smith. The transition can be clearly seen in the birth of classical economics. Of course, trade was still extremely important for them and for the British national system but the distinctive feature of their work, compared with the mercantilists, the French Physiocrats and the earlier Italian economists, was the emphasis on investment in manufacturing. Smith s polemics against the mercantilists were often unfair (Reinert, 1997). They were not blind dogmatists wanting simply to accumulate gold and silver, as they were often portrayed, but they were more concerned with trade and its regulation than with industry. The Physiocrats maintained that the growth of manufacturing could actually endanger prosperity which depended in their view on agriculture. The city-state innovation systems of the Renaissance had many remarkable achievements in craft industries as well as in financial systems, shipping, the arts, medicine and science. We have nevertheless, started this account with eighteenth 114

8 century Britain because this was the time when Britain diverged from its great trading competitors in Spain, Portugal and the Netherlands and when the embryonic innovation systems which had grown up in the period of the Renaissance developed into something new, associated with the predominance of capitalist industry. A distinction has been made (Lundvall, 1992) between narrow definitions of national systems of innovation (Table 5) and a broad definition (illustrated in Table 6). The narrow approach concentrates on those institutions which deliberately promote the acquisition and dissemination of knowledge and are the main sources of innovation. The broad approach recognises that these narrow institutions are embedded in a much wider socio-economic system in which political and cultural influences as well as economic policies help to determine the scale, direction and relative success of all innovative activities. The decisive changes which came about in seventeenth and eighteenth century Britain and later in the United States and other European countries, were the elevation of science in the national culture, the multiplication of links between science and technology and the systematic widespread embodiment of both in industrial processes in the new workshops and factories (Table 6). The cultural changes associated with the Renaissance were pushed even further in the direction of secular instrumental rationality and its application to industrial investment. 3. THE BRITISH NATIONAL SYSTEM The decisive differences between the city-state innovation systems of the Mediterranean and the British national system were in the role of science and the role of industry. The role of science is still disputed by historians. Some accounts (e.g. Greenwood, 1997) argue that science in Britain in the eighteenth century lagged behind other European countries, especially France and that it was not particularly important for the success of the industrial revolution. What these accounts tend to misconstrue is that it was not the location of a particular scientific discovery which mattered. These may have been more frequent outside Britain. What mattered for the industrial revolution was the prevalence of a scientific culture. The treatment of Newton in Britain compared with the treatment of Galileo in Italy exemplifies this point. Newton was revered in Britain by both state and church while the fate of Galileo was altogether different. Francis Bacon (1608) had already proposed an integrated policy for science, exploration, invention and technology at the beginning of the 17th century. There was an exceptionally fortunate congruence of science, culture and technology in Britain which made it possible to use science, including Newtonian mechanics, on a significant scale in 115

9 the invention and design of a wide variety of new instruments, machines, engines, canals, bridges, water wheels and so forth. For example, the British Industrial Revolution depended on water power (not on steam power) for over half a century. It was Joseph Smeaton in his papers and drawings presented to the Royal Society in the 1770s whose experimental work made possible a scientific and technological breakthrough in the design of water wheels more than doubling the productivity of water power. The use of iron rather than wood, first of all for the gears and later for the entire water wheel, was made possible through Smeaton s work as a consulting engineer for the Carron Iron Works, by then already the largest iron foundry in Europe. This is only one example, although a very important one, of the positive interplay between science, technology, culture and entrepreneurship which characterised the British national system of innovation. The congruence of these four subsystems of society extended also to the political sub-system, which promoted all of these. According to many accounts (e.g. Needham, 1954) it was the failure of the Chinese Empire to sustain congruence between these sub-systems which led to the failure of China to sustain its world technological leadership. The conflict between church, state and science (e.g. Galileo) hindered a more fruitful development of both science and technology in the Italian city-states and elsewhere in Europe. The different role of science in Britain and Italy has been especially well documented by Margaret Jacob (1988). This was not the only factor which weakened the city-state innovation systems. Even more decisive were the scale economies made possible by factory production, capital accumulation and specialised division of labour. It was an Italian economist, Antonio Serra (1613) who first recognised the extraordinary importance of increasing returns to scale but he died in prison whereas Adam Smith was honoured by the British Prime Minister ( We are all your pupils now ). Enterprises and workshops were still very small in eighteenth century Britain but the shift from cottage industry to factory production and the constant improvements in machinery were still enough to confer a huge advantage on British manufacturing firms. Nowhere was this more obvious than in the cotton industry (Table 7) where the combination of technical inventions, investment in machinery, factory organisation, and entrepreneurship in ever-wider markets (facilitated still by naval power) opened an enormous productivity gap between Britain and all other producers. Some enterprises in the two leading industries, cotton and iron, already deployed hundreds of people by

10 Investment in industry certainly owed a great deal to profits from trade but this could not have taken place without a change in the culture and attitudes of the landlord and middle classes as well as changes in the capital markets. The investment in the transport infrastructure by the British landlord class was unique in Europe and caused Marx to remark that Britain had a bourgeois aristocracy. The bourgeoisie and the landlords in Britain behaved differently following the victory of Parliament over the monarchy and the aristocracy in the English Civil War in the mid-17th Century. This victory made irreversible political and social changes despite the restoration of the monarchy in The investment in trade, transport and industry became even more important than the ownership of land. The local political initiative of landlords in promoting a wave of investment in canals in the late eighteenth century was exceptionally important in the early take-off of several key industrial districts whose access to national and international markets had hitherto been hindered by poor communications and transport. Schumpeter always maintained that the spread of innovations was necessarily uneven both with respect to timing and to space and this was certainly the case with the spread of those innovations which comprised the British Industrial Revolution. They were not evenly spread over all parts of the country, they affected only a few industries at first and they diffused relatively slowly to other European countries. The main centres of innovation, of urbanisation and of the rapid growth of new industries were not in the London region but in the North of England, especially in Lancashire and Yorkshire, in the Midlands and in Scotland. Originally, the reasons for the success of the new sub-national industrial regions or districts had little or nothing to do with economic policy at a regional level. The main advantage of the North was probably the more rapidly flowing rivers of the Pennine Hills which provided the consistency and strength of flow for Smeaton s water wheels. The iron industry was obviously also influenced by the location of wood for charcoal and later, coal and iron ore deposits but much iron ore was still imported in the eighteenth century. However, although geological factors such as rivers for navigation or water power and deposits of minerals or the lack of them, played an important role in determining the early growth of various industries, these natural advantages were soon overtaken by created advantages such as the transport infrastructure, the location of ports and access to skills and to markets. Lancashire enjoyed the advantage of the port of Liverpool which was the centre of the North Atlantic trade with North America. Many economists, and especially Marshall, pointed to the external economies which resulted from many firms in the same industry located 117

11 in the same industrial district where the secrets of industry are in the air (Foray, 1990). To this day, these external economies of agglomeration have continued to be extremely important in industries as diverse as semi-conductors, toys, and machine tools. They are an essential part of the argument of Piore and Sabel favouring small firm networks as against large mass production firms. They are also one of the main reasons for some economists to propose that sub-national regional innovation systems have now become more important than national systems themselves. There is much in the experience of the British Industrial Revolution which appears at first sight to favour this view. Above all, the accumulated specialised skills in Lancashire were one of the major reasons for the extraordinary success of the Lancashire cotton industry, undoubtedly the leading sector of the British Industrial Revolution, accounting for 40 per cent of all British exports in 1850 and still for over a quarter of a much larger total in In their explanation of the reasons for British dominance in cotton persisting throughout the nineteenth century, Mass and Lazonick (1990) attribute this sustained competitive advantage to a cumulative process in which the development and utilisation of several key productive factors reinforced each other. These affected labour costs, marketing costs and administrative costs. In all of these areas, industry scale economies (Marshall s external economies of scale) were important: In the case of labour: 118 During the nineteenth century the development and utilisation of labour resources provided the British cotton industry with its unique sources of competitive advantage. The major machine technologies... required complementary applications of experienced human labour to keep them in motion. Experience gave workers not only specific cognitive skills (of which a process such as mule spinning was much more demanding...) but also (and more important over the long run) the general capability to work long hours at a steady pace without damaging the quality of the product, the materials or the machines. (Mass and Lazonick, 1990, p. 4) Mass and Lazonick lay particular stress on the habituation to factory work and cumulative skills of the labour force but they also stress that the trade union organisation at that time and in that sector, (surprisingly for some stereotyped ideas of British industrial relations of later periods and other industries), were

12 particularly congruent with incentives to sustain and increase productivity. Great responsibility was given to the more skilled workers (who often had previous experience in domestic craft work) for recruitment, training and supervision of the less skilled. Besides the general habituation to factory work that came from growing up in factory communities and entering the mills at a young age, cotton workers developed specialised skills in spinning particular types of yarn and weaving particular types of cloth. (Mass and Lazonick, 1990, p. 5) In common with other historians they point to the economies of agglomeration in relation to pools of specialised skilled labour in various Lancashire towns: Bolton (fine yarns), Oldham (coarse yarns), Blackburn and Burnley (coarse cloth), etc. Similar arguments apply to the availability of skilled mechanics adept at maintaining (and improving) the local machinery. The gains from increasing productivity were generally shared with the skilled workers, whose union power ensured this. By the 1870s cotton industries around the world could readily purchase British plant and equipment and even British engineering expertise. But no other cotton industry in the world could readily acquire Britain s highly productive labour force; no other industry in the world had gone through the century-long developmental process that had produced the experienced, specialised and cooperative labour force that Britain possessed. (Mass and Lazonick, 1990, p. 8) Similar arguments apply to the machine-building industry and to mill and machine design. Whereas the early mill-wrights came from the earlier tradition of cornmills, wind-mills, etc., with the increased specialisation and sophistication of machinery, special and cumulative skills became increasingly important here too. All of this led to high levels of machine utilisation as well as lower initial costs of machinery. Again in relation to material costs, the highly concentrated Liverpool cotton exchange provided Lancashire with an exceptional advantage. Foreign buyers found it cheaper to buy in Liverpool than anywhere else in much the same way that the Amsterdam flower market re-exports to the entire world today. The Manchester ship canal and the railway from Liverpool from 1830 onwards meant 119

13 that transport costs for Lancashire were extremely low. Lancashire spinners could avoid the heavy warehousing costs of more distant competitors. It was not quite just-in-time but was well in that direction. The Liverpool market gave Lancashire enormous flexibility in grades and types of cotton and spinners took advantage of price changes on a weekly basis. Furthermore, Lancashire had a unique capability to work with inferior grades of cotton for any market in the world and even to cope with the partial switch to Indian cotton at the time of the American Civil War. The world-wide marketing structure was yet another cumulative advantage of the Lancashire industry, which like all the other factors mentioned provided external economies for the firms in the industry. The structure of the Lancashire industry itself with the very well-informed merchants, converters and finishers meant that it had the capability to deliver whatever product the customer demanded to any part of the world rapidly. Again, inventory, transport and communication costs could be kept low through this industry-wide advantage. Similar economies of agglomeration applied to other industries such as pottery (Staffordshire), cutlery (Sheffield), hosiery (Nottinghamshire) or wool (Yorkshire). There is no doubt that these sub-national systems of innovation or industrial districts, as Marshall called them, made major contributions to the success of the industrial revolution in Britain. However, it by no means follows that the national system was unimportant or that it was simply the sum of the sub-national systems. Each of the industrial districts could flourish not only because of the specialised local advantages and institutions (pools of skilled labour, exchange of experience, trade associations, etc) but also because of national advantages conferred by British political, cultural, economic and technological institutions. Easy access to a large and rapidly growing domestic market as well as to foreign markets, access to the capital market and a legal system which protected property and its accumulation, and access to a national pool of engineering and scientific knowledge. In fact, the national and sub-national systems complemented each other. It is hard to believe that the British Industrial Revolution would have been more successful if Britain had been divided into twenty or thirty separate states, cities and principalities as Germany and Italy then were. In fact, Friedrich List and most of those concerned to catch up with Britain in the nineteenth century advocated a confederation of German states preceded by a Customs Union (Zollverein) and bound together by a national railway network and other national institutions because they perceived the many advantages of a unitary nation state. 120

14 The national advantages of Britain which complemented the specialised subnational industrial districts were admirably summed up by Supple (1963): Britain s economic, social and political experience before the late 18th Century explains with relatively little difficulty why she should have been an industrial pioneer. For better than any of her contemporaries Great Britain exemplified a combination of potentially growth-inducing characteristics. The development of enterprise, her access to rich sources of supply and large overseas markets within the framework of a dominant trading system, the accumulation of capital, the core of industrial techniques, her geographical position and the relative ease of transportation in an island economy with abundant rivers, a scientific and pragmatic heritage, a stable political and relatively flexible social system, an ideology favourable to business and innovation - all bore witness to the historical trends of two hundred years and more, and provided much easier access to economic change in Britain than in any other European country. (Supple, 1963, p. 14) 4. THE UNITED STATES NATIONAL SYSTEM OF INNOVATION The economies of scale achieved for British firms and the British industrial districts by the removal of internal trade barriers and by British trading and naval superiority were even more important in the rise of the United States economy. During the second half of the nineteenth century and the first half of the twentieth century it was the United States economy which grew much more rapidly than any other (Table 8). Not surprisingly, the country whose national system of innovation most closely resembled the British system in the eighteenth century were the former British colonies of the United States of America. However, in the first half of the nineteenth century, despite a rich endowment of natural resources and many favourable institutions, growth was still retarded by the lack of an appropriate transport infrastructure to take advantage of the natural endowment and size of the country and its market. It was the advent of railways and the new technologies of the late nineteenth century which enabled American entrepreneurs to forge far ahead of the rest of the world. At first, the United States imported much of this technology from Europe. Many of the key inventions in cotton spinning and weaving were smuggled out of Britain and across the Atlantic by British craftsmen as it was then illegal to export this technology. Arkwright s water frame was an example of 121

15 a machine that was carefully memorised and then re-built in America. But from the very beginning American inventors modified and reshaped these technologies to suit American circumstances. By the end of the century American engineers and scientists were themselves developing new processes and products in most industries, which were more productive than those in Britain. As we have seen, among those institutions most favourable to economic growth in Britain were the scientific spirit pervading the national culture and the support for technical invention. These features were readily transferred to the United States and respect for science and technology has been an enduring feature of American civilisation from Benjamin Franklin onwards. As de Tocqueville observed in his classic on Democracy in America (1836): 122 In America the purely practical part of science is admirably understood and careful attention is paid to the theoretical position which is immediately requisite to application. On this head the Americans always display a free, original and inventive power of mind. (de Tocqueville, 1836, p. 315) The early immigrants were obliged as a matter of life and death, to learn by doing about agricultural techniques in the American Continent and agricultural research emerged early as an outstanding feature with strong public support. Whereas in Europe, with the partial exception of Britain feudal institutions often retarded both agricultural and industrial development, the United States never had any feudal institutions either in agriculture or any other part of the economy. Moreover, the relative abundance of land, the Westward moving frontier, the destruction of the native civilisations or their confinement to a relatively small part of the territory, all favoured a purely capitalist form of economic development with a relatively egalitarian distribution of income and wealth amongst the white immigrants in the early period. The big exception to these generalisations was of course the slave economy of the South. It is difficult to assess the degree to which the economic growth of the South in particular and of the Union in general was retarded by the prevalence of this slave economy but it was in the period which followed the victory of the North in the Civil War that the United States achieved rates of growth well above any previously achieved by Britain. This was a case of the sub-national system of the South retarding national economic growth until the victory of the Union and the major institutional changes which ensued, especially the abolition of slavery. Even

16 after its abolition, slavery left an enduring legacy of social and economic problems, some of which persist to this day but the maintenance of the Union meant that the predominantly capitalist path of development in the North and West prevailed in the whole country. In these circumstances an entrepreneurial culture could flourish as nowhere else. Historians such as Abramovitz and David (1994), who have examined American economic history after the Civil War point to several characteristics of the United States economy which were in combination exceptionally favourable to a high rate of economic growth. These were (i) resource abundance in both land, minerals and forests; (ii) an exceptionally large and homogeneous domestic market facilitating production, marketing and financial economies of scale, especially in the extractive, processing and manufacturing industries. Abramovitz and David argue that the higher relative price of labour in North America interacted with these advantages to induce substitution of capital and natural resource inputs for skilled labour. This stimulated already in the first half of the nineteenth century the development of a specific American labour-saving, capital-intensive technological trajectory of mechanisation and standardised production, which at the lower end of the quality range had enabled US manufacturing to surpass British productivity levels already by As the 19th Century advanced, the engineering techniques of large-scale production and high throughput rates became more fully explored and more widely diffused. American managers became experienced in the organisation, finance and operation of large enterprises geared to creating and exploiting mass markets. (Abramowitz and David, 1994, p. 10). The extent to which this specific American trajectory of tangible capital-using technology diverged from that of Europe (and Japan) can be clearly seen from Table 9. Until the 1880s the UK still had an overall capital/labour ratio higher than that of the United States but by 1938, like all other countries, the ratio had fallen to less than half that of the United States. The large cost reductions and productivity gains associated with this North American technological trajectory could be illustrated from numerous industrial sectors. The extraordinary productivity gains in mining and mineral processing are emphasised in particular by Abramovitz and David, whilst the productivity gains in agriculture are very frequently cited by other historians. The examples of steel and oil are particularly noteworthy because 123

17 of the key role of these commodities in all kinds of tangible capital-using investment projects, in capital goods themselves, in transport and in energy production and distribution. Cotton, iron, canals and water-power were the leading sectors in the early British Industrial Revolution; oil, steel and electricity were the leading sectors in the huge American spurt of growth from 1880 to Viotti (1997) points out that these differences and the case of the chemical industry in Germany mean that catching up in the late nineteenth century and early twentieth century was rather different from what it has become in the late twentieth century. The United States and Germany, he suggests caught up by radical innovations in new industries, not by incremental innovations in cotton spinning and weaving. Today, the late-comer countries may not have the option of radical innovations in new industries and have no alternative but to pursue the path of imitation and learning. However, he makes a distinction between active learning systems and passive learning systems, taking the examples of Korea and Brazil to illustrate his point. We shall pursue this example in Section LATE-COMMER CATCH UP IN THE TWENTIETH CENTURY Very large economies of scale were characteristic of the forging ahead process in the United States, especially in steel, chemicals, oil, minerals and electricity. Even after the Second World War, when the OECD (previously OEEC and ERP) organised many European missions to study the productivity gaps between European and American firms, they frequently stressed scale of plant and size of domestic market as two of the biggest comparative advantages of US firms. This kind of thinking lay behind much of the political impulse to establish first the European Coal and Steel Community and later the European Common Market (Customs Union) and the European Economic Community. Just as the German nationalists, following Friedrich List, believed that a German Customs Union would greatly facilitate catch-up with Britain, so the European federalists believed that a European Common Market would accelerate European catch-up with the United States. This philosophy still influences the debate on EMU today. Catch-up by Western Europe did indeed take place between 1950 and 1975 (Table 10) although it certainly cannot be attributed uniquely to scale economies and market enlargement. As with the first British Industrial Revolution, a general capability for institutional and technical change was essential and not merely scale economies. European research and development activities, technology transfer, education and training, and management techniques were all greatly improved. 124

18 Investment by United States firms in Europe and by European firms in the USA also facilitated the transfer of technology and management techniques. All these things were necessary even to achieve the scale economies themselves. Not surprisingly, however, economists who were interested in catch-up by latecomer countries were especially impressed by the scale economies of North American and European firms and when they came to study catch-up phenomena, they stressed this point in particular. Gershenkron (1962, 1963) studied the catchup by 19th Century German and later Russian firms in the steel industry and argued that the new (latecomer) firms could acquire and use the latest technology, at much lower costs than those in the pioneering countries, by transfer agreements, inward investment and the recruitment of skilled people. Even more important in his view was the fact that the pioneering firms and countries had already established a growing world market so that the catch-up firms did not have to face all the uncertainties, costs and difficulties of opening up entirely new markets. Gerschenkron s theory of latecomer advantages stressed that the pioneers could not possibly start with large plants, whereas the latecomers could move very rapidly to large-scale production, while their mature competitors might be burdened with smaller plants embodying now obsolete technology. Jang-Sup-Shin (1995) in his study of the Korean steel industry endorsed this Gerschenkronian explanation, pointing out that Posco, the largest Korean steel firm was able to leapfrog European and American firms with respect to plant size and technology and thus enter the world market as a low-cost producer. He extended this analysis to the case of the semi-conductor industry arguing that here too the plant-scale advantages of the Korean producers of memory chips enabled them to leapfrog the European semi-conductor industry and to compete with the most successful Japanese and American firms. However, he accepted that the Gerschenkron latecomer scale economy advantages had to be complemented by a national system of innovation explanation of successful catch-up since neither in the case of steel, nor in the case of semi-conductors could catch-up have taken place without many institutional changes, especially in education, training and R&D. Bell and Pavitt (1995) pointed to another problem with Gerschenkronian catchup theory: a country which simply instals large plants with foreign technology and foreign assistance will not experience the build-up in technological capability over several decades, which has been characteristic of the leading countries. Consequently, below capacity working and low output capital ratios have often 125

19 persisted in developing countries. Active learning policies of the type prescribed by Bell and Pavitt, by Viotti and by Alice Amsden, will be essential to overcome this disadvantage of latecomers. Perez and Soete (1988) provided a more general theory of the science and technology infrastructure needed for effective catch-up. They showed that even the costs of imitation could be rather high in the absence of an infrastructure which is taken for granted in mature industrialised countries. Even more important, they showed that these costs would vary systematically at different stages of evolution of a product or a technology. Thus, while Gerschenkron could be regarded as the leading theorist of latecomer advantages, Perez and Soete reflected the experience in numerous developing countries of latecomer disadvantages and difficulties in catching up the leaders in technology. However, they did also point to windows of opportunity in the acquisition and assimilation of technologies, provided the catch-up countries followed appropriate social, industrial and technology policies. Gerschenkron himself argues that countries could only enjoy latecomer advantages if they could also make innovations in their financial system so that the huge scale of investment needed for very large plants could be accommodated. However, there is another important point about latecomer advantages which Gerschenkron did not sufficiently explore: the plant scale economies of a particular historical period were not necessarily characteristic of all industries or of other periods. As Perez and Soete showed, scale economies are industry-specific and technology-specific. In a number of industries, such as aircraft or drugs, scale economies in design and development costs were much more important than plant-scale economies in production. In still other industries, scale economies in marketing may be decisive. In the steel industry itself as well as in semi-conductors, plant scale economies have changed with technology. Nevertheless, Gerschenkron s theory of latecomer advantages was an important complement to infant industry arguments. The much higher growth rates in some catch-up countries illustrated in Table 10 are obviously attributable in part to the fact that costs of technology acquisition and implementation are lower and the risks and uncertainties are less in catch-up situations. Imitation is usually easier and less costly than innovation A very big gap in technology does provide a potential for fast catch-up. 126

20 Finally, as traditional international trade theory has always stressed, latecomer countries will usually enjoy labour cost advantages and these may be very large now because of the wide disparities in world-wide per capita incomes. These labour-cost advantages may also be reinforced by lower costs of particular materials and of energy, as well as climatic advantages. All of these things as well as the narrow and the broad national innovation systems affect the potential for catch-up and its realisation. It also seems to be the case that geographical and cultural proximity to nations which have led either in forging ahead or in catching up has a considerable effect on rate of catch-up. It would be difficult otherwise to explain the clear-cut intercontinental differences which are apparent. Britain was first caught up and overtaken by neighbouring European countries and by countries partly populated by British and other European immigrants (United States, Canada, Australia, etc.). The most successful catch-up countries in the late twentieth century have been those which are geographically (and in some respects culturally) close to the leading catch-up country of the twentieth century - Japan. Thus, it is not altogether surprising that East Asian countries and some South- East Asian countries grew much faster than Latin American countries in the 1980s and 1990s, despite the fact that the Asian countries started from a much lower level of industrialisation and productivity than most Latin American countries (Table 11). This would appear at first sight to support a simple convergence theorem - the later the faster. But before jumping to any such conclusion it is essential to recognise that not all late-comer countries were catching up; some were falling further behind and some were standing still. The countries and sub-continents making the fastest progress have actually varied enormously both in the nineteenth and the twentieth century. Uneven development is a much more accurate characterisation of growth than convergence. In a well-known paper, De Long (1988) showed that Baumol s (1986) attempt to establish the convergence theorem using Maddison s data was fundamentally flawed:... when properly interpreted Baumol s finding is less informative than one might think. For Baumol s regression uses an ex post sample of countries that are now rich and have successfully developed. By Maddison s choice, those nations that have not converged are excluded from his sample because of their resulting persistent relative poverty. Convergence is thus all but guaranteed in Baumol s regression, which tells us little about the strength of the forces making for convergence among nations that in 1870 belonged 127

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